Telecom stocks may be at the bottom of the bear cycle: S Naren, ICICI Pru MF

S Naren: What we learnt from the 2008 financial crisis was that financials tend to do badly if economic fundamentals deteriorate and no amount of bottom up work in financials works. It is much more top down which works and on that basis when we saw current account deficits spiral in 2009 we actually started to go underweight financials and that call has worked for us. But having said that, we have seen that some of the leaders in that sector have done and we have been underweight those stocks as well. But till we see a resolution of some of the economic issues, this is a sector which has always worked everywhere in the world based on the country's macro.

ET Now: Within the financial space everyone is hiding in private banks, but given the way how Axis Bank and ICICI Bank, both these large cap private banks have moved this week, do you think somewhere investors are paying the price now for this crowded trade?

S Naren: No, I do not talk about companies, definitely not my sponsor. Our view has always been from 2009 that there should be a increase in NPLs, but having said that the moment you see, for example, a big diesel price hike and you see a drop in fiscal deficits, there will be a huge profits in the treasury book of banks, which happened if you remember in the 1999-2003 period which took care of most of the NPLs of banks at that point of time. Somehow I am of the opinion that the moment a massive diesel price hike happens, we go through the 1999 to 2003 phase where a lot of profits come from treasury and those profits in treasury are used to take care of the NPLs which come due to the cycle.

ET Now: Are you indicating that PSU banks are nearing the end of the cycle and for private banks the NPA cycle is just about to start?

S Naren: No, no. I am saying that if you have a massive increase in diesel price, which will make our fiscal deficit look much better, financials as a sector will look much better.

ET Now: In general, is there deep value in PSU banks now because if I look at the big quality banks also now, either they are trading at the book value or trading on nearing the book value.

S Naren: But you see the world. Today, for example, I was looking at some Japanese banks. A leading Japanese bank trades at 0.5 times book. The No. 1 Japanese Bank.

ET Now: There is no growth there?

S Naren: Yes. There is earnings' growth there by the way and they are taking away market share from the western banks. So, actually, in my reading, banks are macro players. It is not a function of valuation, this is something I learnt from Bill Miller's interview on the poor performance of his Legg Mason value fund in 2008, that financials as a sector are not perceived to be leveraged entities. But the equity market in 2008 taught Bill Miller that financials had leverage and so what we do is we do deep work on all our stocks in this sector because essentially banks are a leveraged vehicle and you have to be careful in that sector and it has worked for us very well over the last four years.

ET Now: What is your current tactical call which is a short-term call or more like a medium-term call and then what is your structural call where you are confident on maintaining that position for next three to five years or maybe for next ten years?

S Naren: The structural call would clearly be telecom in my opinion. It would be select tech stocks because I do not think you are going to have India without technology sector. So, these are our structural calls. Our tactical call at this point of time is we are very worried about the festival season. We are very worried that there will year-on-year de-growth in many of the consumption sectors. So what we have decided is we look at many of the strong companies, not dependent on the festival season. For example, utilities in the coal space, in the power utility space, these are all spaces where even if the festive season were to be bad, the earnings would not get downgraded. At this point of time, we are worried that the earnings can get downgraded in many of the stocks during the festival season. So we are picking stocks looking at that.

ET Now: That is an interesting call at a time in general when there is a serious disenchantment against PSU companies, you have a large exposure to Coal India and NTPC. So do you think PSU stocks are fairly priced or they are insulated to a global environment?